The MLP sector has been one of maximum pain for investors. Such long and brutal bear markets often tend to produce conditions for maximum returns for sectors. Often, not always though. We have stated our bias here previously, and the MLPs investors will be best served by sticking to quality and avoiding common shares. Preferred shares and baby bonds where feasible offer the best possible risk-adjusted returns, in our view.
But what if we are wrong? What if the sector has bottomed and the market has discounted the tremors ahead? In that case, which is the best way to play the sector? We recently highlighted two funds in this space (see here and here), and neither of them come close to the one we are about to talk about today.
The First Trust MLP & Energy Income Fund (FEI) is one of the best-performing MLP funds and is shockingly ignored. This “not-so-well-known” closed-end fund invests in the MLP sector using one of our favorite strategies. It uses covered calls to reduce volatility and enhance returns. We have always deployed options in our own trades, and they are the single best “free” source of alpha there is. They act to reduce volatility and also help investors buy low and sell high (not a marijuana reference).
FEI has managed to do something rather extraordinary from the point of view of the common investor. It has taken leverage, within a sector that has gotten decimated, and managed to outperform non-leveraged passive ETFs like ALPS Alerian MLP ETF (AMLP).
That is a truly outstanding achievement from the point of view of the common investor, but one we predicted as the fund was busy selling covered calls in a thoughtful manner. FEI delivered -47.79% over the last five years